QMG INSIGHT – 17th February 2016 – Chart of the day Reliance Steel & Aluminum (RS US)

 

KEY POINTS

  1. Reliance Steel & Aluminum (RS US) set to report 16Q4 results on Thursday (18th February)
  2. Expectations are for negative sales growth of -16.6% yoy however QMG data expects it to be worse
  3. Based on QMG ratings, no reason to own RS US until further positive economic signals are evident
  4. Better investment would be in downstream sector of Vehicle Body manufacturers

 

EARNINGS ANNOUNCEMENT

Reliance Steel & Aluminum (RS US) report 4Q earnings results on Thursday (18th February). Analyst consensus expects sales growth to be at -16% in the upcoming quarter however QMG’s analysis sees more negativity than this.

RS US has a strong level of correlation between its quarterly reported earnings and QMG data for Producers of basic iron, steel & ferro-alloys (US27.1)

  Correl

 

QMG DATA STILL SHOWS UNDERLYING WEAKNESS

The earnings drivers for producers of basic iron, steel & ferro-alloys shows all 3 drivers (price, cost and volumes) heading in the wrong direction. Demand weakness and weak commodity pricing is having a negative impact on price and volume growth which are in deep sub-zero growth territory. Couple this with rising costs and the outcome is quite poor for both sales and operating margins.

PCV

 CONCLUSION

Based on the weak underlying QMG data for Steel producers, the quality of the product group falls underneath our rating  thresholds…

 

QMG

coupled with the strong correlation of RS US to QMG’s data, it gets an unattractive score (-60.1) and is listed on our current US model portfolio amongst our negative views.

Earnings estimates for both Revenue and Operating Margins are both below QMG analysis of expectations for US steel producers.

Cons

Using these facts, we would recommend against ownership until further signs of positivity become apparent.

 

overall

 

On the other hand, an advantage of QMG data however is that we can use our supply chain analysis to find areas where investment would be better suited. Whilst the upstream steel producers are experiencing weakness, downstream products like US manufacturers of vehicle bodies (US34.2) are still quite strong.

PCV - 34.2

Stocks like PACCAR (PCAR US) exhibit a strong level of sales correlation to the sector (+89% over 5 years) and the share price is up +8.4% YTD.

Correl 34.2

It represents a better investment for those needing to be exposed to the US and the materials or its various related sectors.

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